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The World Bank’s Board of Executive Directors approved a loan of US$400 million to support reforms that will help the Government of Indonesia increase the depth, improve the efficiency, and strengthen the resilience of the financial sector.

The COVID-19 pandemic has caused recession in Indonesia, with potentially long-lasting financial, fiscal, and social implications. While the banking system is well-capitalized and profitability is high, the lack of depth in the Indonesian financial markets increases the country’s vulnerability to external shocks. The new financing is designed to help the country address financial sector vulnerabilities heightened by the pandemic. It does so through support to measures such as extending financial services to previously underserved groups, reducing the costs of such services for individuals and businesses alike, and strengthening the capacity of the financial sector to withstand financial and non-financial shocks.

The new development policy loan will support Indonesia's financial sector reforms through three key approaches. First, it aims to increase the depth of the financial sector by expanding the  access to financial services - including by youth and women - broadening the range of financial products, and incentivizing long-term savings. These efforts would reduce Indonesia's vulnerability to foreign portfolio outflows.

Second, it aims to improve the efficiency and lower the cost of the financial sector by strengthening the insolvency and creditor rights framework, protect consumers and personal data, and make payment systems more efficient and faster by utilizing digital technology. The latter will help large-scale social assistance payments to vulnerable people during the crisis.

Third, it aims to boost the capacity of the financial sector to withstand shocks by strengthening the resolution framework to avoid financial activities disruptions in the event of a bank failure, advancing the effectiveness of financial sector oversight and implementing sustainable finance practices.

The World Bank’s support to financial sector reforms in Indonesia is an important component of the World Bank Group’s Country Partnership Framework for Indonesia, whose engagement area on strengthening economic resilience and competitiveness contains a specific objective focused on increasing the depth, improving the efficiency and strengthening the resilience of the financial sector. The new financing is also based on the World Bank Group’s GRID (green, resilient, inclusive development) principles.